Ask the Institute

DATE: January 07, 2013QUESTION: Can you explain the concept of Discount Arbitrage?

ANSWER:Discount Arbitrage refers to the ability to buy an in-the-money option for less than its real value and to simultaneously take an opposite position in the underlying security. The arbitrageur may either buy a call at a discount and simultaneously sell the underlying security - basic call arbitrage - or he/she may buy a put at a discount and simultaneously buy the underlying security - basic put arbitrage. To learn more about Discount Arbitrage, view this week's segment of "Ask the Institute."